Statistical evidence on the mean reversion of real interest rates: SPSM using the Panel KSS test with a Fourier function

Abstract

This study applies the Sequential Panel Selection Method (SPSM) to test the mean reversion properties in the real interest rates for the G-10 countries (i.e. Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, the United Kingdom and the United States) over the period 1980M1 to 2010M12. SPSM classifies the whole panel into a group of stationary countries and a group of nonstationary countries. In doing so, we can clearly identify how many and which series in the panel are stationary processes. Empirical results from the SPSM using the Panel Kapetanios et al. (KSS; 2003) test with a Fourier function indicate that the mean reversion holds true for all the G-10 countries. Our results have important policy implications for the G-10 countries under study.

Keywords:

• mean reversion
• real interest rate
• Sequential Panel Selection Method
• Panel KSS test with a Fourier function

JEL Classification:

• C33
• C32